About 5 years back we were addicted to watching a popular business news channel, almost daily in our office. And our clients and prospects used to drop in and share their insights about a particular company or the markets. What was noticeable was that, while most of the views were followed by lot of details and research reports, there were some investors who used simple common sense and paid no heed to these expert comments when they came to invest.
One such investor (that I will always remember) invested in a pharma sector fund(where investments are made in shares of pharma companies). His simple logic was that, every time he visited a pharmacy there was a huge rush for procuring medicines. Today he is a very happy investor, obviously as his investments have earned handsome returns.
In a country where our investments are measured by the very popular (car maker tv commercial) saying:
"कितना देती हैं" (what are the returns?)
it is very difficult to let go of ones emotional attachment towards investments, after all it’s human nature to be emotional, and life is richer because of this. But it reduces investment returns. We make systematic errors in investment thinking, due to our emotions, egos and innate cognitive biases.
We suffer from confirmation bias, tending to seek out and find evidence to support our position rather than evidence that might refute it. We think too much about risk, resist admitting mistakes and hold grudges for too long.
Invest in what you understand.Have a circle of competence, and stick to it. An investor needs to do very few things right as long as he or she avoids big mistakes, and staying within your circle of competence is one of them. Every investment product has factors which are knowable, unknowable, important, and unimportant; investing in products for which the important factors are knowable is recommended.
Invest in yourself.
Consciously choose to develop the positive traits in you, to become the kind of person others would want to invest in. Best of all, when you invest in yourself, you won’t just get 10% of the benefit, you’ll get the full 100% this is possible if you have clear Financial Goals. Once you have set your goals, your thought process will be transparent than ever before. This will ultimately allow you to realize your full potential.
Warren Buffett is a perfect example of rationality. His investment decisions are insulated from such emotions. He has said he’d never give up a good night’s sleep for a chance at a slightly better return. He thinks long term and so he doesn't panic.
To invest better, become a student of human psychology. Learn how emotions lead to cognitive errors, so that you can avoid those errors and benefit when others make them.
Ninad Kamat CFPCM
www.letsmakeaplan.in
Sketches are sourced from Carl Richards of behaviourgap and are used with prior permission of the creator. They are subject to copyright.
Source: Investing lessons by Warren Buffet.
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